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March 7, 2014

Getting Clients to Follow Your Advice: The Overspending Retiree

As all advisors know, it’s one thing to provide clients with appropriate advice and another thing to actually get them to follow that advice.

In this series of reports, Investment Advisor columnist and psychotherapist Olivia Mellan and financial behavior specialist Kol Birke of Commonwealth Financial Network address some common scenarios that advisors face in getting their clients to follow through on their advice. This advice for advisors flowed out of a web seminar hosted by Investment Advisor and ThinkAdvisor editor Jamie Green late last year.

When clients run into problems because they didn’t follow your advice, they may be able to recover if they’re still earning income. It can be a bigger problem, however, if they’re in retirement with a limited pot of money.

Scenario 5: Overspending Retirees

Jamie Green: A client couple has finally entered retirement, and you’ve carefully planned for their withdrawals. However, the couple’s spending is far higher than you planned.

Their requests for special outlays—to buy a boat for themselves, then a car for a grandchild just graduating from college—worry you because their portfolio is shrinking faster than you planned, plus it’s become an administrative nightmare for your staff. What should you do?

Olivia Mellan: It’s very important to meet with a couple together—and, if they have any bad will or any kind of power imbalance, possibly separately as well—to revisit their goals and assess whether they’re positioned to meet those goals.

I sometimes ask a couple to agree on the time frame for their short-, medium- and long-term goals, then go off separately and list their own personal, couples and family goals several times to see which ones they can really trust. Last, they look at each other’s final goals and try to harmonize the two lists. If clients are spending money more quickly than you thought they would, I think this is a good exercise to see how aligned they are.

Also, you need to take time to bond with them and empathize with what they want to do with their money. It doesn’t help just to say, “Listen, you really can’t afford to do this.” They won’t listen to you, and if either one of them is a spender, that person will feel very rebellious and resentful and probably won’t take your advice. But if you really bond with what they want, and see what the underlying need is—do they have an underlying need to support their grandkid, for instance?—then you can try to suggest other scenarios. Could they support him in a more affordable way than buying him a car?

After sufficient listening and patience, you can brainstorm with them about what they will do if they don’t have adequate funds to meet all their goals.

I would highly recommend my friend Dorian Mintzer and Roberta Taylor’s book, “The Couple’s Retirement Puzzle: 10 Must-Have Conversationsfor Transitioning to the Second Half of Life.” I think this resource can help couples flesh out their vision in a way that is more realistic and has better will behind it.

Kol Birke: I love what Olivia said, especially in terms of digging into what clients care about.

In a negotiation class I took years ago, the biggest thing that stuck with me is the difference between “interests” and “positions.” For example, a position might be “I want to pay for my kids’ college.” But there are interests driving this position, such as wanting to support the children’s future. Once you figure out what the client’s interests are, you can potentially find a new position that might work almost just as well or maybe even better without putting them in financial peril.

That said, in many of these situations you can get away without as much conversation by simply reframing. Let’s say these clients have $1 million in their portfolio and they need to be drawing income from it for the rest of their lives. Whether you use a bucket approach or a simple 4% withdrawal rate from that portfolio, let’s say they’ll need $800,000 to support their lifetime income needs. The remaining $200,000 becomes their discretionary fund.

So if the wedding for their kids goes from $10,000 to $20,000, instead of them thinking, “Oh, what’s another $10,000 against a million dollars?”, they’re now comparing that extra $10,000 against $200,000, which is the only discretionary money they’ll have for the rest of their lives. So now they’ll tend to be more careful.

Whether you actually create a separate account, which is what Minnesota-based financial advisor Jonathan Guyton does, or you just describe it to them as a separate pool of money, this approach tends to have a really nice impact. And it gives them choices. If they start to run down that $200,000 too quickly, you can say, “No problem. As we’ve discussed, $800,000 should be able to provide you about $2,500 a month to cover your expenses. If you’d like to move some of that $800,000 to your discretionary fund, we can adjust the $2,500 a month down. It’s your choice.”

By framing it nicely with this separate $200,000, as Jonathan Guyton suggests, it puts the decision in the clients’ hands. “Over the course of your life you can make whatever decisions you want, whether it’s a vacation, a new car that you hadn’t planned for or whatever else. You can use your money for anything.” This tends to be a nice, practical approach to curb clients’ overspending in retirement.